Jefferson County, Alabama’s $3 billion settlement with creditors is threatened by the current interest rates being demanded by the market, the lawyer leading the county’s bankruptcy-exit strategy said.
Unless rates return to the lower levels seen in the last few years, the county may “have to go back to the bargaining table,” Ken Klee, the bankruptcy attorney leading the restructuring, said in court today in Birmingham, Alabama.
Jefferson County’s reorganization plan is built on a settlement with creditors, including JPMorgan Chase & Co. (JPM) and a group of hedge funds. The bank and the hedge funds hold the majority of the $3 billion in sewer warrants that the county proposes to cancel and replace with about $2 billion in new debt.
The interest rates that the county must pay on that new debt can’t be too high or the settlement will need to be renegotiated, Klee said. The county may not be able to pay the current market rates, which were driven up earlier this year by comments made by Federal Reserve officials, a credit crunch in China and Detroit’s bankruptcy, Klee said.
When the county begins a “road show” to sell the debt to investors this fall, rates will need to be lower to succeed, Klee said during the hearing in U.S. bankruptcy court.
“There are substantial risks that it will not be able to refinance come the fall unless the interest rates are within the rates that they have been historically,” he said.
The county’s lawyers appeared in court seeking approval of a disclosure statement that describes the settlement and the county’s plan to emerge from bankruptcy. That statement is designed to give creditors enough information so they can vote on the plan.
U.S. Bankruptcy Judge Thomas Bennett will take those votes into consideration when he decides whether to approve the plan later this year. The county has asked Bennett to consider approving the plan in November, so it can end its bankruptcy by the end of the year, after the financing is in place.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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